25 Ways To Invest $1,000 - financial planning - Cover Story - Statistical Data Included

Kiplinger's Personal Finance Magazine, July, 2001 by Janet Bodnar

COVER | What inflation? For a grand or less, you can BUILD A PORTFOLIO, advance your career, spiff up your home, or patronize a budding Picasso.

BUY THE STOCK MARKET

[1] DISENCHANTED with mutual funds, Matthias Bates wanted to call his own shots without paying hefty commissions or ponying up a substantial minimum investment. "I'd always stuck with funds to keep costs as low as possible," says Bates, who lives in Los Angeles. "There's no way I want to pay $30 a pop for a trade."

So he made a beeline for BuyandHold (www.buyandhold.com), an exceedingly frugal online broker. You need just $20 to open a BuyandHold account, while its close cousin, ShareBuilder (www.sharebuilder.com), has no minimum initial investment. Both brokers let you buy thousands of stocks for minuscule commissions, including a prix fixe option that lets you trade as much as you wish per month for $15 at BuyandHold and $8 at ShareBuilder. Commissions on a one-time purchase for a regular account max out at $3 apiece at both brokers--a bargain even by online standards. You can also buy fractional shares, making it easy to dollar-cost average your way into stocks with lump-sum amounts.

For example, $1,000 could buy $164 worth of each of the six battered blue-chip stocks featured in Kiplinger's last month (see "Bright Ideas," June). At recent prices that would get you 2.9 shares of Clear Channel Communications, 2.8 shares of Enron, 3.3 shares of General Electric, 3.4 shares of Home Depot, 1.7 shares of Johnson & Johnson and 3.5 shares of J.P. Moroan Chase. Fees would consume, at most, $15, or 1.5% of your total capital. By comparison, you'd spend at least $30 at any online broker to buy shares in all six stocks, and you wouldn't be able to buy partial shares.

Bates, 36, started his account with a $2,000 bonus from work. He put equal amounts in a handful of investments, then directed about $300 a month to one stock at a time, keeping his expenses low by choosing individual trades instead of the all-you-can-trade plan.

There are a few catches. Outside the prix fixe option, fee structures can get somewhat complicated. For instance, BuyandHold recently instituted a $7 monthly fee for investors who aren't on the all-you-can-trade plan. That includes two trades per month (at $3 each) and is still competitive with other online brokers, but it does increase the relative cost of trading small amounts once or twice a month. Both BuyandHold and ShareBuilder let you purchase from a universe of 4,000 or so of the biggest stocks, but you could have trouble finding smaller, lesser-known companies.

And you can't pick the price you'll pay for a stock. Both brokers keep commissions low by lumping together lots of trades and placing a single order during limited trading "windows." (ShareBuilder does offer real-time trades, but at $16 each you lose the low-cost edge.) "I would not recommend it to day traders," says Bates. "But if you're not in a hurry and want to consistently plunk a little away at a time, this is for you."--BRIAN P. KNESTOUT

2 THINK SAFE

SEX SELLS--except in a market in which tantalizing tech stocks have been oversold and investors are pulling in their horns. In that kind of environment, investors think safety. For $1,000 you can buy any number of investments that are less prone to volatility than stocks yet still pay market rates.

Money-market funds. To get the most for your money, avoid paying a sales load and keep annual expenses to a minimum. The best deals for budget-conscious investors are funds that are boosting yield by waiving expenses. One such is Harbor Money Market fund (800-422-1050), with a 30-day annualized yield of 5.1%, no sales fee and a minimum investment of $1,000. Another solid pick, Strong Investors Money fund, is also waiving expenses, giving it a 30-day annualized yield of 4.8%.

Certificates of deposit. Internet banks are fertile territory for CDs with interest rates that are substantially higher than average. While some require an initial investment of more than $1,000, many are available for less. For instance, $1,000 will buy you a 12-month CD from NetBank (www.netbank.com) with an annual yield of 5%, more than a full percentage point higher than the national average. USAccess Bank (www.usaccessbank.com) has a one-year CD yielding 5.2%, and Nexity Bank (www.nexity.com) is offering a six-month CD with an annualized yield of 5.3%.

Series I savings bonds. Get a market rate and inflation protection, too, with so-called I-bonds, which pay a guaranteed rate of return over and above inflation. Rates are adjusted twice a year, in May and November, and bonds purchased now will earn 3% plus the rate of inflation for the entire 30-year life of the bond. At the current inflation rate, that adds up to 5.92% (compared with 5.8% for 30-year Treasury bonds).

Series I bonds have tax advantages that goose their yield. Earnings are free from state and local income taxes, and they may be totally tax-free if you use them to pay for college. You won't pay federal income tax until you cash in the bonds. Buy them in $1,000 chunks at www.savingsbonds.gov, or through payroll deduction. There's a $30,000-per-person annual limit on purchases. --BRIAN P. KNESTOUT